FIN 304 Final exam questions and correct answers 2023

Modigliani and Miller (M&M) - correct answersThe case of perfect markets (mainly no taxes and no costs of financial distress A Firm cannot change the total value of its securities by splitting its cash flows into different streams. Therefore financing decisions do no matter in perfect market and MARKET VALUE OF THE FIRMS IS INDEPENDENT OF ITS CAPITAL STRUCTURE - correct answersTRUE When a company issues debt, what source of risk is created? - correct answersFinancial risk and that's borne by the equity holders. M&M maintained that that's correct but it does not change RA Ra= - correct answersExpected operating income/value of all securities M&M show that although Ra stays constant, Re increases linearly with the debt to equity ratio - correct answerstrue The more the debt the higher the required return on (or cost of) equity but the RRR on the assets of the firm remains the same. - correct answerstrue Equity holders have no interest to the debt policy that the firm follows because any increase in financial risk created by more debt is exactly offset by their higher expected rate of return on their investment - correct answerstrue according to M&M the WACC is always equal to Ra - correct answersWACC=[D/(D+E)]*Rd + [E/(D+E)]*Re The reason WACC stays constant while Re increases is that any increase in Re is exactly offset by the increase in debt ratio and the corresponding decrease in equity ratio - correct answerstrue